Market forecast -Capital Markets Outlook – Will rising interest rates stall commercial real estate activity?

 

 

 

 

 

 

 

 

The best revenge is massive success. –Frank Sinatra

 

by William E. Hughes CIRE Archives » Nov.Dec.14

Strong capital flows, from both equity and debt sources, are boosting the liquidity of the commercial real estate market and driving transaction activity. Equity capital of all stripes — from local investors and 1031 exchanges to institutions that include real estate investment trusts, private equity, and sovereign wealth funds — have accelerated acquisitions and portfolio repositioning to capitalize on the low cost of capital, consistent revenue streams, and rising prospect for appreciation.

At the same time, lenders are back in full force just a few years after the banking crisis. The volume of commercial mortgages, after dropping about 10 percent during the credit crisis, reached a new high at midyear, rising by $140 billion over the past 12 months. Commercial banks have picked up activity in both fixed- and floating-rate loans, commercial mortgage-backed securities volume is strong a second year in a row, insurance companies and government-sponsored agency lenders remain competitive, and mezzanine funds abound.

The wave of liquidity has pushed property prices to record or near-record levels in core markets and is in the process of working its way to secondary and tertiary markets. Property sales are growing in nearly every metro, but investors are increasingly targeting assets in non-core markets as they pursue yields and opportunities with less fervent bidding activity.

A Stronger Economy

The increased liquidity reflects the generally positive outlook for commercial real estate, but the strengthening economy has also supported momentum. Gross domestic product has risen steadily over the last several years — aside from temporary setbacks such as the polar vortex of the first quarter — and the outlook remains positive through the end of 2014.

In addition, steady hiring has finally surpassed the 8.7 million jobs lost during the recession, and by year-end, the U.S. economy should employ 1.7 million more people than the pre-recession peak. Though many remain underemployed or have left the labor force, the hiring trends continue to point in the right direction. This combination of steady growth has allowed the economy to spur demand for commercial real estate while minimizing risks of inflationary pressure.

Job gains have supported limited income growth, but the surging stock market has helped household wealth significantly. As of the end of first quarter 2014, U.S. household wealth was up 19 percent from its 2007 peak and more than 47 percent from the trough in 2009. That has supported rising consumer confidence and substantive gains in retail sales. These steady positive factors will support a growing demand for commercial real estate space on a broad basis.

Interest Rates

Several years of low interest rates have helped the real estate market recover from its downturn with a lot less pain than would have been imagined in the wake of the 2008 credit crisis. The rapid recovery in asset values and rebound in lending have reduced the severity of what many thought would be a second thrift liquidation-style event. Increasing economic strength in recent months has lifted the prospects that the Federal Reserve will begin raising its short-term rates early next year, posing limited risk to the real estate momentum.

 

 

However, interest rates are unlikely to rise quickly enough to slow the economic momentum because demand for U.S. Treasurys remains robust. International investors in particular have sought out the security of U.S. Treasurys as a range of uncertainties plague parts of the world. While China has cut back its purchases, investors from Japan, Europe, and the Middle East have picked up the slack. Risks of escalating aggression in Ukraine and the Middle East cement the perception of the U.S. as a beacon of stability.

What’s more, the Fed is under little pressure to increase rates. The U.S. economy is improving, but inflation has remained in check and the Fed remains focused on the large number of workers that have dropped out of the workforce or are underemployed. The November elections are another wildcard that could re-ignite gridlock in Washington, D.C., and stall the nascent growth cycle.

Consequently, the Fed is unlikely to raise the federal funds rate until the signs that the economy is heating up really accelerate. Presently, most anticipate that this will not happen before the middle of next year, but there is a chance that the Fed will surprise and begin tightening liquidity sooner.

Once rates do begin to rise, the impact on commercial real estate may be nominal. Historically, capitalization rates have not moved in lockstep with interest rates, with tightening spreads being the norm during most growth cycles. As a result, should rates begin to rise later this year or early in 2015, it remains unlikely that cap rates will escalate in pace.

Although cap rates are near historical lows today, the risk premium — the spread between 10-year Treasury yields and cap rates — persists near historical highs. If Treasury yields rise because of positive factors — such as strong economic growth — investors will have a more optimistic outlook about property performance and be willing to absorb some of the rate increase in the form of lower risk premiums. The bottom line is that, aside from a major exogenous shock, interest rates and monetary policy are not likely to have a watershed impact on the economy or commercial real estate in the near term.

Commercial Real Estate Performance

In a real sense, the moderate pace of the economic recovery has been good for commercial real estate performance. Usually new construction comes roaring back after recessions, but incremental growth and the fresh memory of the severe recession has kept development largely in check. Construction is creeping back, particularly for apartments, but it is predominantly centered in core areas of the strongest metros. Supply factors will be slower to emerge and less problematic this cycle than in past recoveries.

Apartments. Apartments have been a favorite asset class for investors since the downturn. Not only did fundamentals remain more stable during the recession, but debt was available from government-sponsored agencies when other lenders tightened their lending criteria. Earlier this year, Fannie Mae and Freddie Mac reined in their lending, and their share of multifamily loans fell to 47 percent in 2014, down from 87 percent in 2009, but it appears they are increasing their allocations through the second half of the year. In addition, banks, insurance companies, institutions, and CMBS programs have stepped up their pace of lending, producing a highly competitive lending environment. Loan rates are mostly in the 4 percent range but can go as low as the mid-3 percent range depending on the term, leverage, and borrower credentials.

With pricing of premium assets in core markets selling with cap rates in the 3 percent to 4 percent range, investors are increasingly moving to secondary and tertiary markets in search of yield. But even those markets are becoming more expensive, as average cap rates for high-quality apartment properties reach below 7 percent.

Office. Investor demand in core markets remains intense. In the first half of 2014, 40 percent of the $50 billion of office sales came from six core markets where class A properties trade at cap rates in the 4 percent range. However, investors pursuing stronger yields and a less-competitive bidding process are increasingly branching into secondary and tertiary markets, where sales increased by 30 percent during the first half of the year. With suburban offices in many metros offering investors a 150-basis point yield premium relative to CBD office assets, investors have begun to search beyond core locations.

 

 

Readily accessible debt capital has also fueled activity this year as loan spreads have tightened by 25 bps from last year. Rates range between 4.4 percent and 5.25 percent for 10-year loans with moderate leverage, and leverage up to 70 percent is common. All lender types have become increasingly active, but national banks have increased their share of lending activity to 26 percent. CMBS will also be a positive factor, and it has already increased lending to this sector by $6.1 billion from last year.

Retail. Nationally, vacancy rates of retail properties have been tightening, as modest absorption has topped the limited construction pipeline. In the year ending in the 2Q14, only 37.4 million square feet of space, or 0.5 percent of total space, came on line. This gradual tightening of vacancies has recently sparked rising asking rents, but rents still remain about 11 percent below their pre-recession peak.

Despite the still-soft performance climate for many retail assets, investor demand is strong, particularly for single-tenant properties that are leased to national tenants. The volume and number of transactions between $1 million and $10 million reached a record $10 billion in the 1H14, while price per square foot and cap rates also hit new heights. Multi-tenant sales are also strong, although shy of peak prices. The availability of debt continues to improve, though lenders remain focused on stabilized properties. Local and regional banks are increasing market share, while CMBS is dominant in secondary and tertiary markets.

Industrial. Investors seeking relative stability and diversity to augment existing portfolios have increased demand for industrial assets. In addition, institutional investors have targeted portfolio assets to build a critical mass of assets in a given locality. Cap rates are tightening for all industrial segments, with warehouses making the biggest gains. Warehouse cap rates averaged 7.2 percent nationally in 1H14, and top properties in major markets traded at yields under 6 percent. Flex properties averaged 7.8 percent cap rates nationally in the first half.

Lenders are actively lending on industrial properties, although underwriting remains relatively conservative. National, international, and regional banks increased their share of industrial loans to 62 percent in 2013, up from 48 percent the prior year. Lenders have largely targeted debt yields of 8.5 percent to 9 percent, producing leverage of 70 percent, while offering longer term rates of 4.6 percent to 5.5 percent.

 

William E. Hughes is senior vice president and managing director of Marcus & Millichap Capital Corp., based in Irvine, Calif. Contact him at william.hughes@marcusmillichap.com.

– See more at: http://www.ccim.com/cire-magazine/articles/323690/2014/11/capital-markets-outlook#sthash.2f8XptsT.dpuf

 

 

I am actively looking to build relationships with Real Estate Investors and Owner / Users for Phoenix  –  Scottsdale   –  Tucson   –  Maricopa County  – Pima County  –  Pinal County  –  Cochise County  –  Santa Cruz County   –Yavapai County  –  Gila County   –   Arizona ,  USA      

Walter Unger CCIM –  walterunger@ccim.net   – 1-520-975-5207  –  http://walter-unger.com

 

 

http://en.wikipedia.org/wiki/Timeline_of_Phoenix,_Arizona_history

3

Facts of Arizona – year 1848 to 2013

http://walter-unger.com/?p=9507

 

4.

Feel free to contact Walter regarding any of these stories, the current market, distressed commercial real estate opportunities and needs, your property or your Investment Needs for Comercial Investment Properties in Phoenix.

 

walterunger@ccim.net

 

1-520-975-5207

 

 

View my listings and my profile at:

http://www.loopnet.com/profile/14101172900/Walter-Unger-CCIM/Listings/

 

www.Walter-Unger.com

 

What is a CCIM?

 

Join My Mailing List

 

 

Please go to my web-site and get all the newsflashes and updates in Commercial Investment Real Estate in Phoenix and Commercial Investment Properties in Phoenix daily

 

www.walter-unger.com

 

 

Check out my professional profile and connect with me on LinkedIn.

http://lnkd.in/bezpJ8t

 

Follow me on Facebook:

http://www.facebook.com/ungerccim

 

Follow me on Twitter:

https://twitter.com/Walterunger

 

 

Follow Me on Google+

https://plus.google.com/u/0/b/114560883588623379451/

 

Walter Unger CCIM, CCSS, CCLS

I am a successful Commercial Investment Real Estate Broker in Arizona now for 20 years and I worked with banks and their commercial REO properties for 3 years. I am also a commercial landspecialist in Phoenix and a Landspecialist in Arizona.

 

WHETHER YOU LEASE OR OWN  NOW IS THE TIME FOR YOU TO EXPAND, UPGRADE OR INVEST IN REAL ESTATE

 

we are at on the a rise of the cycle in Commercial Real Estate.  so there is only one way and it’s called we are going up and now is the time for you to expand, upgrade or invest in Commercial Properties in Phoenix.  The prices on deals I may get you will not be around forever.

 

If you have any questions about Commercial Investment Properties in Phoenix or Commercial Investment Properties in Arizona,  I will gladly sit down with you and share my expertise and my professional opinion in Commercial Properties in Phoenix or Commercial Properties in Arizona with you.Obviously I am also in this to make money, but it could be a win-win situation for all of us. 

 

Please reply by e-mail walterunger@ccim.net or call me on my cell 520-975-5207 or Office:480-948-5554

 

www.Walter-Unger.com

 

Thank You

Walter

Walter Unger CCIM

Associate Broker,  West USA Commercial Real Estate Advisers

7077 E. Marilyn Road, Bldg 4, Suite 130

Scottsdale, AZ 85254

Cell:      520-975-5207   

Office :  480-948-5554

Fax: (480-658-1172  

walterunger@ccim.net

 

View my listings and my profile at:

http://www.loopnet.com/Profile/14101172900/Walter-Unger-CCIM/

 

www.Walter-Unger.com             

 

a little about me and my expertise – video

 

commercial-investment real estate adviser-land specialist

 

https://www.youtube.com/watch?v=PPs3kpKR4nY

 

What is a CCIM?

 

 

Delivering the New Standard of Excellence in Commercial Real Estate 

 

  • Commercial Real Estate Scottsdale
  • Commercial Real Estate Phoenix
  • Commercial Real Estate Arizona
  • Commercial Investment Properties Phoenix
  • Commercial Investment Properties Scottsdale
  • Commercial Investment Properties Arizona
  • Land Specialist Arizona
  • Arizona Land Specialist
  • Land Specialist Phoenix
  • Phoenix Land Specialist
  • Land For Sale Phoenix
  • Land for sale Arizona
  • Commercial Properties For Sale Phoenix
  • Commercial Real Estate Sales Phoenix
  • Commercial Properties Phoenix
  • Commercial Properties Arizona
  • Commercial Land Specialist Phoenix
  • Commercial Land Phoenix
  • Multifamily land Phoenix
  • Retail Land Phoenix
  • Industrial Land Phoenix
  • Land Commercial Phoenix
  • Land Retail Phoenix
  • Land Industrial Phoenix
  • Land Multifamily Phoenix
  • Industrial Land for sale Phoenix
  • Land Industrial
  • P
  • Investment Real Estate

 

Disclaimer of Liability

The information in this blog-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.